Once upon a time, traditional billing models were fairly limited. There were one-off sales with single, fixed charges, allowing the customer to pay only for they want, exactly when they want it. And there were subscription models, through which customers paid periodically—monthly, quarterly, annually—to keep receiving a fixed volume of goods or services. These helped businesses build relationships with clients and provided a more predictable revenue stream.

Of course, both models still exist. Both are still thriving—particularly subscription models, which boomed in every industry in 2020. They allowed folks to continue using their favorite products and try out new services even as they were sheltering in place. However, there's another model that savvy businesses embrace as they work to raise the revenue ceiling, battle subscription fatigue, and provide the value that turns one-time buyers into lifelong customers.

That model is consumption-based billing.

Consumption-based billing (also known as usage-based billing) is a hybrid model that couples subscription services with additional, pay-as-you-go offerings. Consumption-based billing can take on a variety of structures—from simple, pay-as-you-go usage fees to more sophisticated rating models—based on a business's specific needs. You've seen consumption-based pricing models at work on your utility and cell phone bills for years. Still, today, companies in countless industries are entering the consumption-based service space. Specifically, they are charging for a wide variety of add-ons, from several users to multiple transactions completed to additional streaming options for rent or additional products included in next month's box.

Let's dive into why consumption-based billing works so well for both businesses and their customers and what it takes for a company to adopt these innovative models.

Advantages of Consumption-Based Billing

In a business landscape where companies are racing to meet the consumers’ ever-changing preferences and where consumers are laser-focused on value and transparency, consumption-based billing models offer both sides the flexibility they need.

For the Business

Consumption-based models preserve the predictability of recurring revenue—which enhances forecasting abilities and is attractive to investors—while eliminating the natural revenue limits a subscription imposes.

Under this hybrid model, a simple subscription can give customers the most basic feature at a lower price point. A library of a la carte, usage-based add-ons can enable them to customize their purchase to maximize the value they're paying for. Separating the “extra” features removes the revenue ceiling that limits bottom-line growth without losing the predictability from the foundational subscription. Then, as the value and variety of the consumption-based features increase, so does the revenue.

In addition, this division enables businesses to track and analyze product or service usage data more effectively, identifying which offerings customers are buying together, which ones they’re avoiding altogether, and which ones they can’t get enough of. This empowers businesses to update offerings in real-time to maximize value and stay on top of the market. It also makes it much easier and quicker to test and launch new products and offerings separate from the base subscription.

For Customers

For customers, a consumption-based pricing model provides total transparency around what they're paying for versus what they're getting. Additionally, it lowers the barrier of entry for untested products, allowing them to try something new without making a risky (and costly) long-term commitment.

This model has been significant in the wake of the economic turmoil during and following the COVID-19 pandemic. Customers have been tightening their budgets and looking for opportunities to trim the fat from their spending. Underused subscriptions aren't making the cut — sometimes because they aren't distinct enough from other products and services. Sometimes, the one or two top features don't justify the overall cost.

But with lower base subscription costs and the ability to tailor add-ons to pay for only what they need, want, and will use, consumption-based pricing makes it much easier for customers to maximize the value they’re getting for the price of entry.

Mechanics of Consumption-Based Billing

Though the concept is relatively straightforward (and a dream for the business-customer relationship), the implementation requires some upfront time and resources investment. The underlying systems that support consumption-based billing are more complicated than what businesses may already have in place for one-time offerings or simple subscriptions. Here are the three general steps a company should take as it commits to these new and valuable models:

  1. Select the right consumption-based models: the model or combination of models that will strike the perfect balance between maintaining stable, recurring revenue and opening the doors to growth.
  2. Identify what metrics you'll use to measure usage and determine the payment due—and then how you'll store, maintain, and convert usage data to revenue through mediation, rating, and invoicing.
  3. Determine how the business automates these processes to ensure a smooth customer experience, minimize revenue leakage, and allow for high volumes of transactions as the company grows.

Fortunately, no business has to go it alone, but existing billing systems won't get the job done for many businesses. While invoices on a one-time or simple subscription model are fairly standardized, consumption-based billing works on a more individual basis, requiring a different set of systems to work effectively. An agile billing partner can work with you to ensure everything is in place for a smooth transition, no matter how complex the models or how rapid the growth is. For guidance on selecting the right partner, we recommend these two recently published resources from Gotransverse:

For businesses looking for the flexibility and control to produce new revenue streams at scale, consumption-based billing is the way to go. And a quality provider is both a vendor and a partner, working hand-in-hand with businesses to implement and configure the new system and offering ongoing, expert support. At Gotransverse, we support consumption-based billing in all its nuance and complexity, and we pride ourselves on strong working partnerships with our clients. We invite you to tour our platform today for an in-depth look at our capabilities. Then, to learn more about whether Gotransverse is the right usage-based billing partner for your organization, you can request a demo to speak with one of our experts.